WASHINGTON: The bi-weekly inflation series in Mexico is likely to have risen in July. According to a Societe Generale report, the inflation series is expected to have risen 2.54 percent year-on-year. The firmer core inflation and the reversal in energy-led transport inflation are expected to ultimately result in headline inflation to bolster in the fourth quarter of 2016.
The persistent pressure on the Mexican peso contributes to additional strength to this argument. However, the lower recent trajectory signifies that inflation would miss the third quarter and full-year average projection of 3 percent, stated Societe Generale. In June, headline inflation had reached 2.54 percent, while the core inflation had reached 2.97 percent. Core inflation has accelerated steadily closer to the Bank of Mexico’s target rate thanks to firmer tradable goods prices on fall in peso.
However, headline inflation has decelerated in recent months after touching 2.87 percent in February. The weakness in headline inflation is mainly because of slowdown in transport inflation owing to lower energy prices. But in all, the dwelling segment set off the drop in headline inflation to about 2.5 percent last year from about 3.5 percent the year before. The effect of reduced transport and dwelling inflation might persist and keep the headline inflation low in the next couple of months, said Societe Generale.
Sub-target inflation, structurally signals at a much large output gap than was estimated currently, noted Societe Generale. This also implies that the slack in the labor market might be higher than what is indicated by the official unemployment statistics. The likelihood of a lagged pass-through effect from the peso’s fall continues to be a risk on the upside to inflation outlook for this year and the next year. Meanwhile, below expected growth and persistent lower energy prices pose as the main downside risks to the inflation outlook, according to Societe Generale.
